Wartsila Oyj Abp

OMXH:WRT1V

Earnings Call Transcript 2022-Q3

[Hanna-Maria Heikkinen, executive]

Good morning, everybody, and welcome to this News Conference for Wärtsilä Q3 results. My name is Hanna-Maria Heikkinen, and I'm in charge of Investor Relations. Today, our CEO, Hakan Agnevall, will go through our recent performance. And after that, our CFO, Arjen Berends, will summarize our key financials. After the presentation, there is a possibility to ask questions.

Time to start. Please, Hakan.

[Håkan Agnevall, executive]

Thank you, Hanna-Maria. Thank you for the introduction. So looking at Q3. On the positive side, a good order intake. And we do see an increase of 36%. On the challenging side, we have the cost inflation and business mix burdening our profitability. But net sales, we also continue to grow, up 30%. The service business is also in a good progress. Service order intake increased by 27% and service net sales increased by 13%.

Comparable operating result though, decreased with 6%. If we look at the overall global market situation, we do see intensifying cost inflation, prevailing disturbances in supply chains, tightening monetary policies and a challenging macro environment that are creating turbulence within the global business environment.

Then on a recent event, in Wärtsilä, we -- last week announced that we are taking the next step to further strengthen our marine end-to-end life cycle offering by integrating the Voyage business into Marine Power as a business unit.

So if we look at some of the key figures, we can see our order intake is up 36% to EUR 1.6 billion. We can see the services is growing with 27%. If we look at net sales, we are up 30% to EUR 1.4 billion and we see that we are growing service sales with 13%. And you can also see the relation between service sales and to total sales where service sales is 46% this quarter. And if you compare Q3 last year, it was around 53%. So to the point that 2022 is a new build year.

Book-to-bill continues above 1 at 1.13 and this is actually the seventh consecutive quarter where we have a book-to-bill above 1. Looking at the comparable operating result, it is down from 7.9% to 5.7%. If you look year-to-date, though, the absolute comparable operating result is up 17%.

Looking at net sales and comparable operating results now in the graph format, we do see net sales at EUR 1.4 billion, and we see the 13% increase in services side. And comparable operating results at EUR 82 million, it is a 6% decline.

Looking at the marine markets. The sentiments continue to improve despite the growing macroeconomic concerns. Demand for new ships has moderated as many shipyards are operating at close to full capacity. And looking at the number of vessels that were ordered in the review period in Q3 decreased to 1,095 from 1,400. Vessels contracting was largely driven still by container ships and also record high orders for LNG carriers, driven by, of course, the turbulence and the strong demand for gas in Europe, where we need to move from pipeline gas to gas carried by vessels.

The transition to cleaner fuels continued with 326 orders placed globally for alternative fuels. And that represents about 30% of all the new build contracting in the review period.

If we look at cruise, the focus of the cruise sector has now shifted towards improving onboard occupancy levels in a profitable way and mitigating the impact of rising operating costs. And if you look at the active cruise fleet, it has been well over 90% on average during the quarter.

Looking at the energy side, energy markets are affected by global cost inflation and price volatility. And we do see a good continued demand for balancing solutions. The environment -- the investment environment witnessed a higher quotation prices, slower customer decision-making and considerable uncertainty. Supply chains are in turmoil as inflation, exchange rate fluctuations and trade restrictions shadow the global business.

The decreased pipeline gas flow from Russia to Europe plays new constraints and on the demands and also on the gas trade. The Inflation Reduction Act in the U.S. will allocate substantial incentives for renewables, battery energy storage and other clean energy technologies. And we do see continued growth in demand for energy storage solution.

Service growth also continued for us, and customers are showing an increasing interesting long-term agreements. If you look at our market share in the gas and liquid fuel power plants market, we declined from 9% to 7%.

Looking at overall order intake. As we talked about, it increased by 36%. There equipment orders continues as a strong journey. It increased with 45% and services also solid increase in order intake by 27%. That leads to also a strong order book.

And if we look at the rolling 12 months, we see the book-to-bill continues well above 1, 1.16. On the sales side, net sales increased by 30%, and we see that equipment net sales increased by 49% and service net sales increased by 13%.

Now technology and partnership highlights, and we are on a decarbonization journey shaping the carbonization for Marine and Energy. And one really important step and a milestone for that, that is the launch of our new Wärtsilä 25 engine. It is a leader in its range in both efficiency and emissions. And it also very fuel flexible. So the modularity of a ship owners and operators maximize flexibility while ensuring efficiency and fuel economy second to none.

It's already capable to operating on diesel and LNG, either on gas, liquid or the carbon-neutral biofuels. And it is easily upgradable to operate with the future of carbon-free fuels. So it is prepared for fuel conversion for fuels like ammonia and for methanol.

If we look at the different technology sector now in Voyage, we have a really important order for our Spec system. It's the smart panoramic edge camera systems, where DFDS will deploy this technology on a ro-ro Selandia Seaways. And Selandia operates in a busy and challenging route, and that has now been retrofitted with the smart technology to provide 360 situation awareness. It eliminates the blind spot by providing a 360 vessel view, enhancing safety and enabling the crew to make better operational decisions based on real-time data.

Now let's move on to the different businesses and see how we are doing. This is the Wärtsilä 25. It's the beauty -- new camera to the family.

And Marine Power, basically, all key figures improved. Service order intake increased by 21%. You can see order intake is up 33%. Net sales 21%. If you look at the comparable operating results on the positive side, the strong service sales continues.

On the challenging side, we do see cost inflation, especially affecting material, component, transport and also test fuels for developing our new technologies. Component availability continues to be a challenge and also the high energy prices is affecting us in our testing. We consume a lot of fuel in our testing.

If we look at the Marine Power service growth and the service agreement, we can see that net sales from installation under agreements is strongly increasing. One example, among others, is a recent agreement that we struck with the CBO Group in Rio de Janeiro. And we have signed an agreement on modeling decarbonization. The objective is to support and accelerate CBO's journey towards decarbonized operation for its fleet of offshore support vessels, and they are among the largest in its segments in Brazil.

So what are we doing? We are doing a detailed analysis of both short- and long-term solutions, including digitalization, energy efficiency and energy saving devices also including hybridization and future alternative marine fuels. And since we are in Brazil, there is a specific focus on the viability of ethanol fuel.

Marine Systems, a great team in Japan. Marine Systems' net sales and comparable operating results increased. Order intake decreased. So you see the order intake decreased by 34%, whereas net sales is up 30%.

If we look at the comparable operating results on the positive side, clearly, the higher sales volume is contributing to profitability. And on the challenging side, we do see an unfavorable sales mix between equipment and services.

Turning to Voyage. And here, you have an example of a spec system, one of the cameras for spec system. The order intake increased, however, the Russia exit impacted both sales and profitability negatively. Order intake, up 58%, net sales down 10% and the real challenge here on the comparable operating result is the closure of the profitable Russian turnkey business and also the acceleration of the cost inflation.

Our journey on the cloud solutions continues. So we continue to increase our installed base. We increased it 20% quarter-on-quarter with connected vessels. Another example of the digital journey in Voyage is a port operation and support for ports operation where we also made the PortLink acquisitions sometime back.

So here, a very important order with the Associated British Ports and to help them to digitalize their marine operation. So we have signed a contract for a 5-year framework agreement with ABP to digitalize the operations in 21 ports. The project aims to accelerate the digital transformation of port calls and operation, making them a sufficient, sustainable and safe as possible. And the program includes just-in-time solutions, machine learnings and AI to optimize port calls and drive sustainability.

Energy. Order intake and net sales increased. However, the comparable operating result declined. You can see order intake up 66%. Net sales is up 43%. So looking at the comparable operating results and what is happening there. Well, on the positive side, if you look at the mix within services, it's a favorable mix driving up the profitability. But we do have some headwinds on the profitability. We have a less favorable sales mix between equipment and services. So more equipment and services on a relatively speaking.

We have higher storage volumes, and we know storage has a negative EBIT continues. And then we have a general impact of cost inflation. This is a great example, and I would say a proof point of our balancing strategy. So we will support the integration of renewables in Japan's power mix by providing balancing power gas engines. And this new plant in Japan will operate 10 Wärtsilä 34SGs. It will replace an existing combined cycle gas turbine plant, 100-megawatt that was located at the same site before.

Now the fast charging engines will provide the grid balancing and the peaking capabilities needed as Japan increases its share of energy from renewable sources. And the main purpose of the utility scale power plant is hedging market price fluctuations, and it will enable participation in the recently launched cross-regional balancing market.

And to set the scene, Japan is committed to addressing climate change and has set a target to have a share of renewable energy increasing to up to 38% until 2030.

Looking at the service side of energy, it's also growing in a very inspiring way. I mean the installed base covered by long-term service agreements is clearly increasing, as you can see. An example within the services side is automation upgrade and long-term agreement that we have made for our power plant in Cameroon. So we will provide an upgrading project of the electrical and automation system to ensure the optimal reliability of the Kribi Power Station in the Republic of Cameroon. So it's a 260-megawatt plant. That has been operating for nearly 10 years and it's operating 13 50DF dual fuel engines running primarily on natural gas. And now we will support the customers operational and maintenance performance with a 10-year long-term service contract.

Now other key financials. Arjen, please.

[Arjen Berends, executive]

Thank you, Hakan. All right. If we look at the other key financials. I think the highlight on this slide is the positive operating cash flow of EUR 100 million in quarter 3, after two quarters of negative cash flow, negative EUR 122 million in the first quarter and negative EUR 19 million in the second quarter. It's very good to see a positive cash flow now in Q3.

Positive cash flow was generated basically 50-50, you could say, between profit and the change in working capital and okay, by reducing working capital, improving our cash flow, we were able to reduce our net debt compared to Q2 with about EUR 55 million and also gearing from 0.21 to 0.18.

Solvency went slightly down, let's say, from last quarter to this quarter, mainly coming from increased cash and inventory balances. And then that was financed by payables, basically meaning suppliers; and deferred income, basically meaning customers.

Basic earnings per share was 0, very much impacted also, of course, by the write-downs that we did relate it to Trieste. If we look at the graphs, let's say, the EUR 100 million, I mentioned already, let's say, about 50-50 generated through profit and changing working capital. As we said also earlier, we have been building up working capital in the beginning of the year to facilitate the higher delivery volumes in the second half of the year. We saw a positive impact of that by the change in working capital already in Q3 and we also anticipated, let's say, the deliveries of Q4 will generate positive cash flow for us going forward.

With these words, I hand over to you, I'll come back on the prospects.

[Håkan Agnevall, executive]

Thank you, Arjen. So on the prospects, we expect the demand environment in the fourth quarter to be weaker than the corresponding period last year. But we should note that Q4 last year was all-time high order intake in the history of Wärtsilä. So what we're also saying that for the full year of 2022, we expect the demand to be slightly higher than in the previous year, than in 2021. Now the prevailing market conditions make outlook uncertain still.

Okay. That was the presentation of today. So Arjen, you will rejoin me, and we open up for the Q&A. And as Hanna-Maria will normally tell us, let's go around, and let's take -- at least in the beginning, we take one question per person asking a question. So please feel free.

[Operator]

First question on the line is from Vivek Midha, please, you can ask your question.

[Vivek Midha, analyst]

Hi, everyone. Can you hear me?

[Håkan Agnevall, executive]

Yes.

[Vivek Midha, analyst]

So my question is on price costs. So given both cost inflation and your improving price realization, could you maybe give us a sense of how the margins in your backlog have been evolving in the last few quarters? And if you have any sense, albeit in an uncertain environment, when we might be able to see price and cost effects starts to have a net neutral effect on the group margin?

[Håkan Agnevall, executive]

So basically, you could say that -- if you look at our service business, we are working with price realization almost in real time. And so this is a more fast-moving business. So there are the opportunities for price realization are good.

If you look on the new build, on new tenders that we are doing, we are also working with price realization. The challenge for us is, of course, the existing order backlog. And you know that -- some of our order backlog stretches out over time. But just to give you a flavor here, if we -- in our view, we could really see an acceleration of the inflation, you could say, end of Q1 this year.

And if you look at the order backlog then at that stage, we had about EUR 2.2 billion in our order book backlog for deliveries in 2022. If we look at the order backlog at that stage as well, we had about EUR 1.2 billion for deliveries in 2023. That gives you a little bit of a flavor related to your question.

[Arjen Berends, executive]

Of course, very important or difficult to actually to adjust the pricing.

[Operator]

Next question is from Max Yates.

[Max Yates, analyst]

I just wanted to ask a quick question on the guidance. So you've obviously sort of talked about Q4 demand being lower year-on-year. But obviously, when we look at the -- compared to last year, you had a EUR 480 million barge order in it. So I'm not surprised to see that guidance, but I was wondering if you could talk maybe excluding that large order a little bit around kind of how you would see the more sort of base business. Should we assume that the guidance is related primarily to that large order? Or actually is it for the base business as well? And how should we think about that?

[Håkan Agnevall, executive]

So I would clearly say that this relates that we took a couple of very big orders, discrete orders in Q4. And I would also -- I think we are trying to -- because of that, we are trying to give some queues related to when we look at the full year. And you know that we are saying full year of 2022 will be slightly better than full year of 2021. That gives a little bit of steering where we are ahead.

[Max Yates, analyst]

Okay. I'll leave it there and then maybe come back another one later.

[Operator]

Next question is from Antti Kansanen from SEB.

[Antti Kansanen, analyst]

My question would be on the service growth, which obviously for orders and sales has been very strong this year. Is it possible to talk about volume growth, I mean, excluding the price realization that you mentioned and obviously FX. And then more broadly going into next 12 months of '23, what are you expecting in terms of cyclical growth, not perhaps getting a number here, but just the kind of the tailwinds, risks, challenges and then the kind of the positives that you are seeing as well?

[Håkan Agnevall, executive]

So if we start with looking at the organic growth in sales year-to-date, now this is both new building services. You have seen it's 22%. So there is a strong organic growth, clearly overall in the Wärtsilä business.

Now if we zoom in on the services side, I think what we are seeing is two phenomena, and it's a little bit hard to delineate those two phenomena. One is that we see a very strong utilization of our equipment. I would say both on the marine and energy side, and we see that as a strong trend going forward.

Then on top of that or beside that, running in parallel, of course, we have our strategy of moving up the service value ladder with agreements, and we see that, that is giving results. So it's a combination, but we do see a continued positive development.

[Antti Kansanen, analyst]

But I'm just thinking mix going into '23, and this was something that we started the year talking about how adverse it will be for this year and one reasons for the soft margins. So can kind of the -- you know your backlog for next year at this point, largely equipment driven. So can kind of the service momentum continue? Or will we see a similar negative mix in '23?

[Håkan Agnevall, executive]

I think we need to see -- you're right, we're certainly building our backlog. I think we need to see also a little bit of Q4 before we make a similar statement for next year. I would say. But please note that services is growing, in our view, in a good way. It's just that equipment is growing even faster. And I'm sure that we're going to talk more about energy here and storage for Q3.

And I think one very interesting piece of the information, if you look on the sales growth in Q3, you could see that new build, both the thermal and the battery, it grew with approximately 75% in Q3, Q-on-Q, whereas services only grow with 3%.

[Arjen Berends, executive]

And that has a big impact on the profitability.

[Håkan Agnevall, executive]

Yes, for Q3.

[Operator]

Next question is from Tomi Railo from DNB.

[Tomi Railo, analyst]

Hi, it's Tomi. Can you hear me?

[Håkan Agnevall, executive]

Yes. Hi, Tomi.

[Tomi Railo, analyst]

Great. This time it works. So just to get a correct feeling that when you are talking about intensifying cost inflation and supply chain issues, is this a change compared to what you saw in the second quarter where I felt at least that you were talking about the, in a way, having more confidence on solid healthy backlog. So have you seen -- and do you really feel that your cost inflation elements have been getting worse or accelerated during the third quarter?

[Håkan Agnevall, executive]

Yes. So just to calibrate a little bit. So, let's talk cost inflation. And there we consider -- we see -- continue to see an escalating situation. When it comes to supply chain disturbances, it's more of a prevailing situation. We don't see it escalating, just want to make that clear.

Now if we look at the inflation, I would say, coming up until now, there was inflation related to materials and raw material. I think we see that is stabilizing or even tapering off a bit. What we see here is the second wave or whatever we want to call it, and it's related to the energy prices because it really affects the cost price for some of the high intensive -- high energy intensity material, like castings that we have in our engine blocks, crankshaft, et cetera.

We also see mix, but also wage inflation coming, so to say. So you can say it's a little bit shift of gravity in the inflation toolbox, if you may say so. Arjen?

[Arjen Berends, executive]

Correct. Nothing to add. I think that's the case. It shifts from raw materials, I would say, to okay, logistics, I think, is still the same as we had earlier as well, but it shifts them from raw materials more to, let's say, the energy prices driving in particular, let's say, prices for components, which are very high intensive in the production process as well as, let's say, salary pressure.

[Tomi Railo, analyst]

Thank you very much for the clarification. And the second question, if I may. On the storage profitability and the losses, can you comment the direction how the performance improved from the previous quarters?

[Håkan Agnevall, executive]

So basically, coming back to my earlier comment about having a certain backlog in Q1 and then what happened. I mean -- and we also know that material prices have been going up on the battery storage side. So I would say that a lot of those orders in storage, we have delivered in Q3 and then there has been a price reset. You can see that, you can actually derive it from our numbers. If you look at the cost per megawatt hour, there has been a clear price reset going forward, so to say.

So in Q3, we have you, could say, delivered some of the previous order backlog that was taken before the acceleration in Q1.

[Tomi Railo, analyst]

And then a final one, extra costs in Voyage. Can you comment any magnitude from the Russian operations?

[Håkan Agnevall, executive]

I'm not sure we are breaking out those numbers. I mean we -- as you know, we communicated our EUR 200 million write-off. We have divested certain parts of our business to local management. And that was business there with a service project mix, that was a profitable, and that is clearly an impact on Voyage.

[Arjen Berends, executive]

That's correct. It's out now.

[Håkan Agnevall, executive]

Then as you have also seen, as we announced that we are now integrating Voyage into Marine Power. And that, you could say that the reason behind it is twofold. I mean, first of all, we want to put really focus on creating an end-to-end perspective and business offering. When we look at the marine ecosystem, you could say, because we have some pretty unique competencies within the group. Of course, on the fleet optimization, on the port traffic management, but also on the performance services.

And I think we have here a unique capability to bring this together and really unlock value to write-down cost and help customers with efficiency taking this end-to-end approach. And this is also noteworthy that the new leader for Voyage is coming from Performance Services. So that is one of the drivers.

The second driver for doing this integration. And we have said it the turnaround of Voyage has taken longer time than we expected and we wanted. It has been a challenging journey with pandemic because Voyage is -- cruise is a very important customer for Voyage. And also on top of that, we have the Russian withdrawal of Wärtsilä, so to say. But we want to accelerate the turnaround. And this is another rationale where we are taking the steps that we are taking.

[Operator]

Next up is Johan Eliason from Kepler Cheuvreux.

[Johan Eliason, analyst]

I was a bit curious on this. You mentioned in the Marine side that around 30% of new orders for ships were for alternative fuels. I was just curious, are you considering sort of gas as an alternative fuel? And secondly, if you look at your value opportunity for those ships with alternative fuels, is that higher or lower than the current opportunity with the traditional fuels?

[Håkan Agnevall, executive]

So in this classification, we do include LNG into the alternative fuel. So you could say it's heavy fuel diesel on one side, and then we talk about alternative fuels in this type of classification, just to clarify that.

And the more alternative fuel orders, the more opportunities for us. Then we should also be careful a little bit because on the big container vessels, for instance, it's 2-stroke engines, and we are not in 2-stroke anymore. So you cannot put -- it's not an immediate connection. But clearly, the more alternative fuels, the more support for our business, absolutely.

[Johan Eliason, analyst]

And if you look at these alternative fuels, excluding the LNG, is it primarily methanol today? Or what are we talking about?

[Håkan Agnevall, executive]

Yes, I would say it's primarily methanol. I mean, there are customers exploring like biomethane, but that you can run in our existing technologies. So biomethane is certainly an avenue, methanol, the orders are coming there. And then we have ammonia coming a little bit in the future, not in the orders yet, but it will come.

[Arjen Berends, executive]

But of course, just to add customers clearly anticipate, let's say, the journey on the fuels. So if they now buy an LNG capable engine, this is the one that is easier convertible to the new fuels than, call it, a diesel engine.

[Operator]

Next is a written question from Daniela Costa from Goldman Sachs. Do you think storage can already break even next year given the growing volumes? And can you comment on how the levels of advances are usually on storage versus traditional business?

[Håkan Agnevall, executive]

So if I start with the first one, and I'll let you answer the second one. The first one, we have clearly said that the turnaround of our storage business will take place over a few years, and we stick to that communication, so to say. Then we should note, as we also have earlier communicated that looking at rolling 12, our gross margins are at least positive.

And then, of course, why are we not breakeven or before or above, it's that we are scaling the business, we are investing in R&D and project management, so to say. But this turnaround will take a few years. And then coming to the financing.

[Arjen Berends, executive]

Yes. On the, let's say, customer payment terms, as you might understand, I don't think we will comment on that. We don't want to make our competition any smarter. But let's say what we are aiming for. And I would say we are pretty successful in that, is that in any storage project, we aim to be project positive cash flow throughout the project execution. So that's for all I can say.

[Operator]

Next up is Antti Kansanen from SEB.

[Antti Kansanen, analyst]

Yes. Thanks for the follow-up. First is on the labor cost or wage inflation. Could you talk a little bit about where you kind of see the biggest risks. I'm thinking about, for example, the storage project is kind of the installation cost, something that is substantial of the overall cost mix and you would be kind of vulnerable given the longer delivery times and the inflation that happens in between. So overall, can you open up that theme a little bit?

[Håkan Agnevall, executive]

No. I mean if you look on where do we have a lot of labor. It's clearly on the service side. I mean, there we have a big, big chunk of our Wärtsilä colleagues. But this is also an area where our opportunities for price realization are the best, so to say.

And -- so if you look at the global perspective, I think where do you see the wage inflation? It varies from different countries. I would say, in the U.S., we certainly see a very strong wage inflation right now. But it's a mixed picture.

[Arjen Berends, executive]

Yes, I think there is not, let's say, one-size-fits-all answer to this. And of course, also in Europe where there is a lot of pressure. I think many countries are also, let's say, governments are thinking about how to support this. So I think that is not one-size-fits-all answer. It depends very much on geography governmental support. For sure, we will see statutory increases most likely in many places. And we need to see how that plays out. But for us, it's very critical that we are very tightly connected to, let's say, our pricing departments, let's say, the ones making the corps that when we anticipate a certain salary raise that we already in advance, let's say, adjust for that in the pricing, so that we are not acting as a response in the middle, let's say, during execution of projects later on.

[Antti Kansanen, analyst]

Okay. And then the second one for me is coming back to the backlog and obviously, on the storage side. I mean, you flagged that you had some EUR 1 billion of, let's say, the low-margin backlog to be delivered in '23. So there's still a little bit of margin pressure for Q4 and early next year. How much is this in storage? I mean, reflecting, Hakan, the comment that you mentioned of the storage deliveries in Q3 and then the incremental price reset. Is this something that flows through next year or already at Q4?

[Håkan Agnevall, executive]

So I don't think we break down the EUR 1 billion there. But I mean -- and you know a little bit the time frame. I mean, if you look on our thermal side, I would say that normally, the lead time from order intake to sales recognition is somewhere in the region of 12 to 24 months, whereas on the storage side, the same time period is probably 9 to 12 months. So there is a shorter lead time.

[Operator]

Next up is Tomas Skogman from Carnegie.

[Tomas Skogman, analyst]

Yes. So this discussion about price realization and so on is, of course, interesting. But when I look at the numbers, what I can see is that you used to have a much higher level of orders in 2016 to '18 for your power plants, including an engine that what we have seen in the last year. So my conclusion starts to be that you have been forced to use the price vacant in the few orders that have been available. And of course, now we have cost inflation hurdling. But to me, it almost looks like you have lowered your kind of regional sales margin also in power plant orders compared to historical levels. What is your comment on this?

[Håkan Agnevall, executive]

I would say it's not as simple as that. I would say this is a mix. And why it's a mix, it's depending on which markets you're operating on. So I would say that there are certainly new orders where we have a good price realization. There are certain -- if we talk thermal now, there are certainly orders where the competitive environment is stronger. So it's a mixed picture.

I would say that what is impacting our profitability in -- if you look on the thermal side now is really the cost inflation and how that is affecting our order backlog. If we look on the storage side, there is a separate story, and you know it, Q1, a big price hike on the material side. And then digest new prices going into Q2 and Q3, so to say. And in Q3, as I said, if you -- when you look at the sales, we are, you could say, eating some of that order backlog that orders that we took before Q1 this year.

[Tomas Skogman, analyst]

So your message is now that H1 will still be tough next year in terms of energy margins, but the outlook from the second half next year is a bit better given what you know about pricing in your order backlog now at the moment, is that right?

[Håkan Agnevall, executive]

No. We don't give any guidance for next half year, so to say. So that was your interpretation, which I respect, but we don't give guidance for the next half year.

[Tomas Skogman, analyst]

And then I just wonder about energy. Of course, there have an energy crisis in Europe and so on, and your product should be more competent than it used to be. But I guess, I mean, what we are really lacking is some kind of a clear legislation in the European Union. Your order seems to come from Japan and the U.S., Australia and some from the U.K., but almost none from the European Union. And I kind of -- I cannot struggle to understand what is kind of the missing part in the legislation or in the pricing of selling balancing power in the European Union compared to other regions. And will there ever be any change in the EU, because now you should have a perfect market there basically.

[Håkan Agnevall, executive]

So a very interesting topic. I would say that, first of all, if we look at how the current high energy prices in Europe is affecting the world, I think it will also drive higher energy prices in Asia, quite frankly, because Europe is now buying gas from the Middle East, and there is a bit of a competition with Asia.

North America has their own gas. So I think we will see somewhat different prices in North America. But if we zoom in on Europe, what are the other consequences? I mean the more short-term consequences, clearly, people will burn more coal or lignite, which is, of course, not good for the environment. And people will also prolong the operation of nuclear, so to say.

And we also know that there is a -- in some countries, a very -- a growing discussion on nuclear. But when we look at nuclear, let's be frank. It takes decades to implement nuclear with permitting implementation, et cetera. So I think now a lot of the debate, you could say, is rather short-term focused for obvious reasons. We need to get through this winter. We need to get through next winter. And it is to find new gas, burn more coal, chip in the gas, build LNG terminals. I think this is very high on the agenda.

In parallel with that crisis handling, we do see an increased focus on renewables. And I think the key enabler of renewables, is this, I would say, it's a political discussion about permitting because we talked about that before. Everybody wants green but not in my backyard. And I think here, Europe needs to move forward, because there are a number of offshore wind projects that are held back by permitting.

So coming to your question, when will we see more of our balancing solutions both the thermal and the battery in Europe, it is when we get more renewables into the mix, and we start to close down the big coal fire, the combined gas cycle plants. And this will take time in Europe.

When we see the U.S., we can really see that the development is happening there, and this is why we are so excited about the U.S. market. And why is the U.S. going ahead? Well, in the U.S., the conclusion is and it will be the same conclusion in Europe, that solar and wind are the cheapest energy sources. And in the U.S., permitting is not as the same issue as in Europe. So in the U.S., we see a very strong trend going into renewables. And then we see the growth of storage, we see the growth of balancing. So U.S. is actually, in our view, kind of accelerating and going in the forefront of this development.

[Tomas Skogman, analyst]

But there is no certain incentive to invest in balancing power in the U.S. that is different from Europe that you would have a separate energy market for balancing power. So because it feels like it's a tough decision for our board to invest in a very expensive power plant that you expect to use, let's say, 70 days a year or so. And you need a really high power price those that you're using, basically.

[Håkan Agnevall, executive]

Yes. I would say in the U.S., what is on the incentive side is actually the IRA, the Inflation Reduction Act that the Biden administration recently launched, because that is tailored to support with tax credits, both renewables and storage, battery storage. But I would say -- when we talk to the U.S. customers, the IRA suddenly helps, but it's not the big enabler for this whole shift.

[Operator]

[Operator Instructions] And next up is Max Yates.

[Max Yates, analyst]

Just two quick follow-ups for me. So if I look at your working capital, kind of over the last 10 years, you've had a very significant improvement in your trade receivables in particular. So I realize we're in sort of in some of these markets, and I guess a bit of a lower volume environment. But I just wanted to understand, when we look at your working capital, do you think kind of vast businesses like storage grow as some of these markets recover, this is a sustainable level? Or is there anything exceptional we should think about in the receivables level?

[Arjen Berends, executive]

Thanks for the question. I think it's a good question. I would not like to go into the details of this too much. Of course, it's very much different per business. Let's say, when you think, let's say, energy power plants or storage or, let's say, call it, Marine Power or Marine Systems, I think the mechanics is very different. I think we are at a good level. And I do believe that, let's say, there is possibility to sustain it at this good level as well. And that's where I want to leave it.

[Max Yates, analyst]

Okay. And the second question was just around, obviously, what we're seeing in the -- actually, sorry, the question -- actually, the question -- sorry, the question I'll ask you is around the Clarkson's data. So we've obviously seen that get weaker in Q2 versus Q1, Q3 versus Q2. And your marine orders kind of in aggregates are actually performing, I would say, kind of relatively well considering.

So when you look at that data, do you -- are you concerned that we're yet to see the impact in your business? Or would you put the sort of relative strength down to your exposure to certain segments, content per vessel? Is there something else that we're kind of missing that's going on here?

[Håkan Agnevall, executive]

Yes, I wouldn't say that we have a direct correlation between the Clarkson's overall data and our business, so to say, because there is so much to stroke business, et cetera. You really need to look at specific segments. And it's the offshore, it's the specialties, it's the crews, et cetera, et cetera. So I think what we see on our newbuild on the marine side, actually, we -- and this we have communicated. We took out quite a lot of Russian newbuild orders from our order backlog, and we have actually been able to refill them with orders, for instance, from the ferry side, some on the LNG side, et cetera, et cetera.

So it is a mixed picture. And we are not the biggest player on the big container segment because, obviously, it's a lot about 2-stroke there. And on the auxiliary side for containers, this is normally not our strong spot so far. It might change with introducing of new green fuels. But if you look currently, it's not one of our strong segments. So when we look at the marine newbuild, we see it's rather -- it is still on a lower level. It's rather stable. And -- but we are cautiously optimistic about the development going forward.

[Max Yates, analyst]

I'm sorry, just one final one on Voyage. I just wanted to understand the thinking behind sort of putting that back into the Marine division because obviously, from the outside, it was helpful to have the disclosure we could track how it was performing, when it was turned around. So could you just talk about the decision to put it in there? And also, how we should think any differently because of what has happened with cost in Russia about a realistic timeline for this to break even?

[Håkan Agnevall, executive]

So basically, I mean, to put things in perspective, Voyage was a EUR 300 million business, give or take. And so it was clearly the smallest business within the whole Wärtsilä family, so to say. But the key driver, as I said before, we were too full -- we wanted to -- because we actually have a pretty exciting, we think, combination of different competencies.

Voyage was a result of, you could say, five acquisitions that we made through a number of years. Actually, we created Voyage to put them all together and put focus on them from an integration perspective, but also to really craft a store in digital marine.

And I think we have done some good progress during the last 2 years, but we have also learnt a lot during the last 2 years. And I think the marine industry has also developed in their understanding and maturity on the digital solutions. And therefore, we see an exciting opportunity to connect, you could say, the fleet optimization that we have in Voyage, it's connected -- and we also had the port traffic management system, but connected to performance-based services that we have in Marine Power. Because you could say, we are all about moving up the service value ladder. So instead of focusing on selling discrete equipment, what services can we build to unlock savings and emission reductions for our customers.

So the logic is now we're trying to put this together, including the performance-based services. So you could say it's a shift. We shift gravity to the performance side. So that was the key driver.

Then the other driver, as I talked about, is that we wanted to accelerate the turnaround. I mean, we should acknowledge that this business during the last 2 years has faced the pandemics, it has faced also the Russian exit of Wärtsilä. And that heavily affected Wärtsilä -- sorry, Voyage, because we had quite a significant footprint in St. Petersburg software development, et cetera, et cetera. So we wanted to accelerate this by also drawing on some of the resources within the Marine Power kind of teams, so to say. So those are the two rationales.

[Max Yates, analyst]

But this -- I mean, this is -- I mean, often the problem, you're giving sort of customers kind of competency you're bearing the cost for it, and you have to try and get a payback. And I guess it's harder from us from the outside to see that payback coming back, and it's not just being rolled into your existing offering and given away for free. So I mean should we interpret this as you're willing to invest in this business for maybe longer than previously we thought now that you're rolling it in, so we may see losses going for longer? That's kind of how it feels from the outside.

[Håkan Agnevall, executive]

Well, I would say that, certainly, if you look at digitalization of Marine, as a theme, we are in that journey for a long run. Then -- so that is clearly an interesting arena to work in. Why? Because -- and many of you know it, there is so much inefficiency in this ecosystem. There is so much waste of time and fuel and I mean -- so it is very exciting. It's also -- clearly, we can see that with digital technologies, which, of course, this journey we are taking in many different industries, we can clearly see the benefits of implementing digital technologies.

Now it's a very fragmented ecosystem. And here lies the cracks to get people and equipment and players to talk to each other. But we do see a very interesting line of business, but maybe more with gravid to performance-based services, it's a little bit like a decarbonization services that we launched recently in energy that is focused more on agreements than selling equipment.

Now as I said, we bring -- the second reason for bringing it was to accelerate the turnaround, not to prolong it.

[Arjen Berends, executive]

And I think we -- and we can really be unique, right, if we combined engine efficiency, propulsion efficiency with voyage efficiency. And that's what the customer is really needing also in the future. The new fuels will be more expensive. So the let's say, focus on efficiency improvement, no matter when it comes from the engine or the propulsion system or the Voyage is very critical going forward for any customer.

[Operator]

And the last question is from Sven Weier from UBS.

[Sven Weier, analyst]

Yes. It's Sven here. A couple of follow-up questions, if I may. The first one is on the shipping freight rate cost for you. I was just wondering the impact on the EBIT, how much of a delay would you typically see between the reduction, the massive reduction that we currently see in those shipping rates and you seeing the benefit of that? That's the first one.

[Håkan Agnevall, executive]

So I'll let Arjen digest your question a little bit, Sven, but I will give you another aspect of the answer. I think what we are focusing a lot is, of course, we need to be cost efficient, and we need to have competitive shipping rates for our own business.

But I think one other critical element is the reliability of the shipping. And this is where we have focused together with some of our shipping partners that to make sure that our transports actually execute because if you consider the liquidated damages we might face in our projects they outweighed a minor saving on transport. Then, of course, it's a balance. Of course, we are challenging our forwarders to provide us something competitive but we really focus on the reliability.

And I would say that this is one of the reasons why on the storage side, we have been having a fairly solid execution track record towards our customers and delivering on time and fulfilling our obligations.

When it comes to detailed numbers, I don't think we are disclosing.

[Arjen Berends, executive]

No, I don't think we disclosed it, but let's say, I think to answer your question, it's also a matter of, let's say, what's the size of the equipment you want to ship. Let's say whatever fits in a container, okay, take service components or whatever. I think there we will quite quickly, let's say, linked to, let's say, the current available prices for container vessels. But if you want to plan, let's say, a transport, let's say, half a year out or even longer than that, that's even, I think, today is still quite impossible because there is nobody yet one willing to commit to it.

And then, of course, it's also, let's say, probably a chartered vessel. So then it's not so simple. And then it will probably take a lot longer time before lower transport costs will translate into our numbers.

[Sven Weier, analyst]

But the structure of the contract is as such that we should have seen the worst of the prior increase already? Or is there still a lagging effect that is yet to come?

[Arjen Berends, executive]

Sorry, I did not get your question fully. Can you repeat?

[Sven Weier, analyst]

The question is on the time lag of the freight rates, right? So I wonder, if you look at the first 9 months, have we seen kind of the worst impact from higher freight rates already? Or is this also a lagging effect on?

[Arjen Berends, executive]

I would say, let's say, the -- call it, the cost inflation from logistics, if we can sum it all together under that frame. I wouldn't say it has radically moved. It started to become bad in the beginning of the year, and I would say it's still quite bad. So it's not -- it's not accelerate -- it's not getting worse, but let's say it's not getting better either.

[Sven Weier, analyst]

Okay. And the other follow-up I had was just following up on the storage market in Europe. And I wonder to what extent is this also a market share issue? Because you're competing against Fluence here and with a strong Siemens partnership probably supporting it quite a bit, and Fluence has just recently received a major order from Germany for grids balancing. I was just wondering if Europe is also a market share issue for you in terms of the ability to strike orders?

[Håkan Agnevall, executive]

No, I wouldn't say that. I mean, we have a strong energy team in Europe. But I will also say that we continue to be selective in our order intake, focusing on the right customers and the right context. And Germany, if you take that, certain orders, they come with pretty draconic terms and conditions. I think we have a balanced view on those, et cetera, et cetera. So -- but I certainly would not -- we are in Europe, and we are very strong in the U.K., so to say. And also in the Benelux we are certainly building our presence. So in Europe for the long run, also on the storage side.

[Hanna-Maria Heikkinen, executive]

Thank you for great questions and thank you for the presentation and great answers, Arjen and Hakan. So now it's time to close this call. Wärtsilä full year results will be published on January 31. Before that we are also hosting a couple of public calls. Firstly, be the CEO Mid-quarter call with Hakan and then followed by Pre silent call with Arjen. Welcome to those calls as well. Thank you.

[Håkan Agnevall, executive]

Thank you very much.

[Arjen Berends, executive]

Thank you very much.